William Watson: U.S. turn to be banana republic

Half a generation ago a Wall Street Journal editorial declared Canada an “honorary member of the Third World.” The shock of that scolding helped return a country that had begun to think of itself as ungovernable back to fiscal and economic sanity. Might a similarly sharp rebuke from its friendly northern neighbour aid in turning an apparently increasingly ungovernable United States back to sanity? Probably not. But we would feel bad for not trying: This summer’s disgraceful spectacle of a U.S. political system seemingly incapable of addressing the country’s dire fiscal condition makes the United States worthy of honorary banana republic status — with the rider that a banana republic that takes chances with the world economy gives bananas a bad name.

In fact, the U.S. fiscal deficit, at more than 10% of GDP, is already much higher than markets will typically allow the average Third-World deficit to go. The only reason the United States can borrow so much is that for at least a century the world’s lenders have considered the “full faith and credit” of the U.S. government to be as good as gold, sometimes better. But now American politicians are toying with their country’s heretofore sterling reputation — a reputation that in fact eclipsed sterling’s — so as to avoid political responsibility for budget compromises that anyone who does not draw a paycheque from Washington politics can see must be part of any final agreement. This they do in the apparent but obviously misguided belief that if their country’s reputation goes, their own can somehow survive.

The U.S. debt, at more than 60% of GDP, is still short of true Third-World status, but it won’t take many more years of 10-point increments to arrive there. Given the United States’ history and reputation, the markets will be kinder to it when it reaches such levels than they would be to genuine banana republics — or than they would have been to Canada had we not changed course in time. But once it starts to go, reputation can be a quickly wasting asset.

As for politics, the U.S. political system is proving every bit as dysfunctional as politics in many third-world countries, including some where the United States itself is doing nation-building. Sartorial, grooming and linguistic preferences aside, is there really much difference between the squabbling, jousting and jibing typical of the Iraqi assembly and what takes place on an average day in Washington? U.S. politicians have much more sophisticated polling, fundraising and communications support, but in terms of outcome is there really much difference? In true banana republics, of course, politics is dysfunctional by being suppressed. One man decides — though that one man is at least where the buck stops. The United States, by contrast, has reached perfectly democratic dysfunction. For the moment, at least, it seems no one will decide.

Sophisticated observers of the processes now underway in Washington assure the anxious outside world that much of what is taking place is theatre and tactic, a necessary prelude to the making of a deal. Necessary perhaps but also sufficient? The stakes are very high, not only for Americans but for the rest of us. No doubt the consequences of a U.S. default are not as lurid as many of the most dramatic doomsayers predict. The world has learned to live with many things common wisdom once thought unthinkable. But it’s hardly hysteria to think the consequences could be serious. Any political deal to avert it is likely to be large and complex. Perhaps it can be done with a last-minute blink and total victory for one side or the other, which is what each side obviously still hopes for. But the closer the default deadline looms without a deal having been done, the greater both the chance and the cost of miscalculation.

A country that regards itself as leader of the world should not be running such a risk with the world economy. If the downside happens and a second U.S.-originated crisis and downturn ensue, the backlash against the United States will be sharp. For foreigners, the era of Barack W. Obama will have begun.

Everyone in Washington seems interested only in: “What’s in it for me?” Taking the same selfish approach for a moment, what’s in the negotiations for Canada? In the short term, the increase in U.S. taxes that President Obama favours will make us a more attractive destination for talent and capital. In the longer run, however, the resulting slowdown in U.S. growth rates would hurt us. We can diversify as much as we like, but so long as geography counts in economics the United States will be our major economic partner. If its economy languishes, ours won’t thrive. Also in the longer run, a higher-taxing United States will provide cover for those who think Canada’s destiny is always to be the even-higher-taxed half of North America. That won’t be good for us economically.

Though few Canadians confess to Republican sympathies, our interests probably do lie on the Republican side of this debate. But the important thing for both the United States and the world is to get a deal. With the U.S. government substantially divided, some form of revenue increase seems bound be part of any deal. Live up to your responsibilities, Washington. Get it done now.

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